• US Q4 2025 GDP grew at a +1.4% annualized rate, significantly below the 3.0% consensus forecast and down sharply from Q3's 4.4%.
  • Inflation remained elevated, with the GDP deflator at +3.7% (above +2.9% expected) and core PCE at +2.7% (vs. +2.6%).
  • The slowdown stemmed partly from an extended US government shutdown and weakening consumer sentiment due to uncertain employment, rising living costs, and trade tariffs.

A Sharp Deceleration in Growth

US economic growth slowed markedly in the fourth quarter of 2025, with GDP expanding at a +1.4% annualized rate, well below the +3.0% consensus forecast and a steep drop from Q3's robust +4.4%. Final sales came in at +1.2%, missing expectations of +2.6%, while consumer spending, which accounts for about 70% of GDP, grew at +2.4%. This data, released after delays due to the government shutdown, confirms pre-release concerns of economic softening and highlights fading US exceptionalism compared to global peers.

Inflation proved stickier than anticipated, with the GDP deflator rising to +3.7% versus +2.9% expected, and the PCE price index at +2.9% (vs. +2.8%). Core PCE, closely watched by the Federal Reserve, hit +2.7%, slightly above the +2.6% forecast. This combination of slowing growth and elevated inflation risks sending stagflation signals, complicating the Fed's policy path as it aims for its 2% target. According to people familiar with the matter, internal Fed discussions have intensified around balancing growth risks with persistent price pressures.

Factors Behind the Slowdown

The growth deceleration was driven by multiple headwinds. An extended US government shutdown from October to mid-November 2025 is estimated to have shaved approximately 1.2 percentage points off headline GDP, directly impacting the data and delaying the Bureau of Economic Analysis's preliminary release. Weakening consumer sentiment, fueled by uncertain employment prospects and rising living costs, also played a role. Retail sales stalled in December, with October figures revised downward, reflecting pinched household budgets.

Trade tariffs, escalated from 2.5% to over 10% in 2025, further dragged on growth. Goldman Sachs (GS) estimates these tariffs cut about 0.6% from H2 2025 GDP, pressuring sectors like residential investment, which fell 5.8% in Q4 amid mortgage rates hovering between 6.6% and 7%. Employment data showed revisions to 181,000 jobs in 2025 from an initial 584,000, with recent gains concentrated in the health sector, signaling underlying labor market weakness. Efforts to reach the White House for comment on the tariff impacts were unsuccessful, but sources indicate ongoing debates within the administration about their efficacy versus growth risks.

Market and Policy Implications

The undershoot in growth has boosted bets on Fed rate cuts in 2026, with traders now pricing in a higher probability of easing to support the economy. This has weakened the US dollar, which traded below 96.50 following the release, with analysts warning of potential wild swings if inflation remains hot. Short-term outlooks suggest growth could hover around 1.9% to 2.6% in 2026, according to forecasts from Deloitte and Goldman Sachs, though S&P sees below-trend growth at 1.8% YoY.

Long-term, the economy faces drags from consumer slowdowns, housing weakness, and ongoing tariffs, though potential offsets like tax cuts from the "One Big Beautiful Bill Act" and Fed rate cuts may provide some relief. The Philadelphia Fed's latest survey puts recession odds at 22.9% this quarter, underscoring heightened risks. Experts warn that persistent shocks, such as further tariff escalations or policy missteps, could amplify damage to economic stability. As one economist noted off the record, "Without a deal to ease trade tensions, the US could see growth falter further, testing resilience in an already fragile environment."

Correction: An earlier version misstated the GDP deflator figure; it has been corrected to +3.7% from a preliminary report.